In late June, both houses of the New York State Legislature passed Bill number S.6306 proposing to reverse New York’s longstanding “no-prejudice rule,” which provides that an insurer need not prove prejudice in order to disclaim coverage on late notice grounds. New York State Governor Eliot Spitzer vetoed the Bill on August 1.

If enacted, the legislation would have required an insurer to demonstrate “material prejudice” before denying coverage based upon an insured’s late notice. The Bill would also have allowed an injured party to file suit for declaratory judgment against an insurer without first obtaining judgment against the insured-tortfeasor which remained unsatisfied, as New York law otherwise requires.

Although he vetoed the Bill, Governor Spitzer invited further debate on the issues raised and left the door open for the introduction of a revised version in the not so distant future.

With respect to the Bill’s late notice provision (Section 3451), in his Veto Memorandum Governor Spitzer praises the Bill’s effort at preventing insurers from denying coverage “based on a technicality,” and notes that the proposed Bill would bring New York into the mainstream as most states presently require a showing of prejudice. The Governor also noted that “[a]lthough there are some drafting issues with these provisions, particularly with respect to the burden of proof that must be met, if this bill merely permitted late notices of claim where there is no prejudice to the insurer, I would sign it.”

Governor Spitzer showed similar admiration for the Bill’s declaratory judgment provision (Section 3001), stating that it “would allow claimants to determine whether and to what extent a defendant’s insurance coverage is available to compensate the claimant for his or her damages, before significant expense and effort is expended in prolonged litigation.” Governor Spitzer did, however, express some reservation about the “actual impact” of the Bill, noting that many insurers and business groups had argued that the Bill would in fact result in an increase of gratuitous litigation.

The Legislature, which passed the Bill within three days after its introduction, did not hear any testimony from the affected parties and therefore did not have an “opportunity to appropriately balance the view of both sides.” As a result, Governor Spitzer has ordered his staff and the Superintendent of Insurance to work with the state legislators and other interested parties, including the insurance industry and trial bar, to further investigate the implications of the “no-prejudice” and “declaratory judgment” provisions of the Bill. Governor Spitzer concluded by stating that “hopefully we can enact a new bill that accomplishes these important goals in a manner that protects the interests of claimants, policyholders and insurers alike.”